Convertible preferred stock in venture capital financing
We develop a model in which cash-constrained entrepreneurs seek a venture capitalist (VC) to finance a new firm. Costly monitoring is employed by VCs to reduce entrepreneurial moral hazard. When monitoring reveals poor performance, VCs want to punish the entrepreneur with liquidation. However, when...
| Main Authors: | , |
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| Format: | Working paper |
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University of Oxford
2006
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| _version_ | 1797072899900702720 |
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| author | Ippolito, F Boccini |
| author_facet | Ippolito, F Boccini |
| author_sort | Ippolito, F |
| collection | OXFORD |
| description | We develop a model in which cash-constrained entrepreneurs seek a venture capitalist (VC) to finance a new firm. Costly monitoring is employed by VCs to reduce entrepreneurial moral hazard. When monitoring reveals poor performance, VCs want to punish the entrepreneur with liquidation. However, when assets are specific and liquidation would lead to a loss, VCs choose to renegotiate the terms of financing, rather than to liquidate. Renegotiation undermines the threat of liquidation. By giving VCs incentives to monitor and liquidate underperforming projects, the hybrid nature of convertible preferred stock helps reduce this problem. As potential equity holders, VCs are willing to absorb the costs of monitoring because this promotes managerial efficiency and increases expected profits. At the same time, as debt holders, VCs are sheltered from loss in a liquidation because they enjoy seniority with respect to common stock holders. |
| first_indexed | 2024-03-06T23:14:21Z |
| format | Working paper |
| id | oxford-uuid:669908bd-73b3-442c-a2d2-58b11ccee5e1 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T23:14:21Z |
| publishDate | 2006 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:669908bd-73b3-442c-a2d2-58b11ccee5e12022-03-26T18:32:56ZConvertible preferred stock in venture capital financingWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:669908bd-73b3-442c-a2d2-58b11ccee5e1Symplectic ElementsBulk import via SwordUniversity of Oxford2006Ippolito, FBocciniWe develop a model in which cash-constrained entrepreneurs seek a venture capitalist (VC) to finance a new firm. Costly monitoring is employed by VCs to reduce entrepreneurial moral hazard. When monitoring reveals poor performance, VCs want to punish the entrepreneur with liquidation. However, when assets are specific and liquidation would lead to a loss, VCs choose to renegotiate the terms of financing, rather than to liquidate. Renegotiation undermines the threat of liquidation. By giving VCs incentives to monitor and liquidate underperforming projects, the hybrid nature of convertible preferred stock helps reduce this problem. As potential equity holders, VCs are willing to absorb the costs of monitoring because this promotes managerial efficiency and increases expected profits. At the same time, as debt holders, VCs are sheltered from loss in a liquidation because they enjoy seniority with respect to common stock holders. |
| spellingShingle | Ippolito, F Boccini Convertible preferred stock in venture capital financing |
| title | Convertible preferred stock in venture capital financing |
| title_full | Convertible preferred stock in venture capital financing |
| title_fullStr | Convertible preferred stock in venture capital financing |
| title_full_unstemmed | Convertible preferred stock in venture capital financing |
| title_short | Convertible preferred stock in venture capital financing |
| title_sort | convertible preferred stock in venture capital financing |
| work_keys_str_mv | AT ippolitof convertiblepreferredstockinventurecapitalfinancing AT boccini convertiblepreferredstockinventurecapitalfinancing |